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Updated, 8:25 p.m. | Henry M. Paulson Jr., who was Treasury secretary when the government rescued the American International Group, said on Monday that a bankruptcy of the insurance giant would have been “catastrophic” for the economy, but acknowledged that the terms of the government’s bailout were “punitive.”

Mr. Paulson was the first of a series of witnesses who were leading government figures during the financial crisis in 2008 to testify in the trial of a lawsuit that challenges what became a $192 billion government rescue of A.I.G. He testified for little less than two hours on Monday morning under questioning from David Boies, the lawyer representing Maurice R. Greenberg, formerly chief executive of A.I.G., and lawyers from the Justice Department.

Mr. Greenberg, a major A.I.G. shareholder through his company Starr International, sued the government, contending that the rescue imposed illegally onerous terms. On behalf of A.I.G. shareholders, Mr. Greenberg is seeking more than $40 billion in compensation.

Mr. Paulson testified on Monday that he believed the terms of A.I.G.’s bailout in September 2008 were “punitive” and “harsher” compared with the assistance other financial institutions received at the time. He said that political considerations played into the decision to apply “punitive” terms to A.I.G.: It had become a lightning rod for public outrage that needed to be dealt with.

Maurice R. Greenberg, A.I.G.’s former chief and a large shareholder, has spun a ludicrous tale in court that the bailout of the insurer was unfair to its investors.

When asked by Mr. Boies if it was important for the government bailout of A.I.G. to be seen as harsh to quell political opposition, Mr. Paulson said it was. The former Treasury secretary acknowledged he made that very point on Sept. 16, 2008 — the day the A.I.G. bailout was approved by the Federal Reserve — when he spoke with Barack Obama and John McCain, who were candidates for president at the time. Being able to explain that A.I.G. faced onerous terms was crucial to getting them to hold back on criticism, Mr. Paulson said. The same was true with congressional leaders, he said.

But despite the tough conditions, Mr. Paulson said he “supported the terms of the loan,” and favored the government’s action to save A.I.G.

Asked by Mr. Boies whether he believed an A.I.G. collapse would have wreaked havoc on the American people, Mr. Paulson responded, “I sure did, yes.”

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Henry M. Paulson Jr., left, a former Treasury Secretary, at the United States Court of Federal Claims in Washington on Monday.Credit Drew Angerer for The New York Times

The government’s lawyers also scored points in their brief examination of Mr. Paulson on Monday, focusing their efforts on how precarious A.I.G.’s position was even after the initial September bailout. By the end of October, Mr. Paulson testified, A.I.G. was on the verge of bankruptcy once again — and faced a ratings downgrade that would have required additional capital that the company did not have. “The situation had deteriorated,” Mr. Paulson said.

As a result, the Treasury Department decided to tap its authority to its then-new bailout fund, known as the Troubled Asset Relief Program, to infuse A.I.G. with another $40 billion in taxpayer cash. Mr. Paulson said he felt it was a necessary decision, but one he feared could blow up in Treasury’s face. At the time, Congress had approved the $700 billion TARP legislation, but had only authorized half of that, $350 billion to be spent.

“I was worried that $40 billion into A.I.G. would so enrage the public and Congress that we might not get the last $350 billion,” Mr. Paulson said.

As to whether there were other alternatives to the public bailout of A.I.G., Mr. Paulson played down that possibility. He was asked by Mr. Boies about the potential for the China Investment Corporation, China’s sovereign wealth fund, to rescue A.I.G. during the critical period in September, and said he did not believe the Chinese would ever have made a deal that did not involve United States government assurances or backstops, which the Treasury Department was unwilling to provide at the time.

Mr. Paulson was on the stand a shorter time than anticipated. It was so fast, in fact, that the next scheduled witness, Timothy F. Geithner, Mr. Paulson’s successor as Treasury secretary, was still in New York, the government’s lawyers said on Monday. Another witness was substituted for him Monday afternoon, and Mr. Geithner will be on the stand Tuesday morning, the lawyers said.